Otis Elevators and the challenges of reshoring

Reshoring has been a popular topic. It’s a lot more fun to talk about optimistic stories of manufacturing and its associated jobs returning to the US (or to high wage developed nations in general) than to focus on companies sending jobs overseas in search of cheaper labor. But how does reshoring go in practice? Once a company commits to bringing work back to the States, how easy it to get a factory up and running?

The company’s move to relocate an Otis elevator plant from Mexico to South Carolina in late 2012 was hailed as a sign of a small renaissance in American manufacturing. The relocation was supposed to save money and help fill orders faster by putting the people who make new elevators next to the engineers who design them, and their customers.

Now, it’s clear the reality hasn’t been so smooth. Production delays created a backlog of overdue elevators. Some customers canceled their orders after being left waiting months, people in the elevator industry said. The plant Otis was leaving behind in Nogales, Mexico, had to stay open for half a year beyond its planned closing date to deal with the backlog.

The arguments for bringing elevator production back to the US were pretty compelling. Apparently, 70% of Otis’ US and Canadian customers are east of the Mississippi so shifting production to the east coast was forecasted to cut logistics costs by 17%. Then there were anticipated savings from having closer interaction between manufacturing and design.

So what went wrong? According the article, the root cause was trying to do too much. Otis didn’t just ramp up a new facility. It revamped its product line, implemented new computer systems and shifted work from other US facilities to South Carolina. Consequently, not all of its woes are due to moving work back from Mexico per se. It had enough balls in the air that problems should likely have been anticipated even if it was intent on leaving its Mexican plant alone.

That said, there is one issue that is distinctly tied to bringing work back to the States.

“The challenge, I think, was moving your supply chain, with your factory and your engineering center, all at once, and quite frankly to an area of the country where it’s difficult to get enough trained workers,” Greg Hayes, United Technologies’ chief financial officer, said in an interview. “It’s not like you’re moving to Chicago or you’re moving to Connecticut.”

Reshoring is exciting because it means jobs but what kind of jobs? Manufacturing jobs once promised good pay and steady work for the less educated. One didn’t need a college degree let alone PhD to be successful. But things have now changed. Successful manufacturing in a high wage location requires that workers be talented and flexible. You still don’t need a doctorate, but jobs now require a significant skill set. As the article notes, jobs at Otis are “higher skilled than the ones that sustained the area” previously. Those skills have to be learned somewhere and I would venture that a massive training program was not part of plan in setting up South Carolina.

So what does this mean? I think it implies that hopes of a manufacturing renaissance need to be viewed with caution. Otis might have had a very strong business case for moving production to South Carolina. The ultimate savings from cheaper logistics as well as product and process improvement from co-locating engineering and manufacturing may more than compensate for a slow ramp up. But their experience of facing a challenging infrastructure (which could be broadly construed as a lack of appropriate workers or appropriate suppliers) is unlikely to be unique.

Now one can argue that workers should be lining up the local community college to learn whatever trade that Otis values and that is true to some extent. However, workers should be rationally cautious about spending time and money to acquire skills for which there is an uncertain payoff. There are limits to how many people Otis will take on so unless the skills are widely applicable staffing up will naturally face some challenges.

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The Reshoring Initiative can make the reshoring transition easier. Reshoring is happening because there are so many benefits to companies and the U.S.

Reshoring is happening because overseas locations are becoming less attractive and reshoring is gaining momentum because it is helping U.S. manufacturers recover from offshoring’s poor quality, trade secret thefts, supply chain disruptions and lengthly delivery times – all while staying cost competitive.

Companies are also finding that when manufacturing is moved next to engineering, they can improve design, eliminate waste, improve quality and increase productivity.

And, companies are reshoring because they are finding that having manufacturing near customers gives them better flexibility to respond to customers changing needs, eliminates higher shipping expense, minimize supply chain disruptions and eliminates the larger production runs and inventories associated with long distance offshoring.

Current research shows many companies can reshore about 25% of what they have offshored and improve their profitability simply by using TCO instead of price to make their decision. 25% is equal to 1 million manufacturing jobs!

The U.S.’s biggest advantage is being the world’s largest market. Our goal is to make 90% of what we consume instead of 75%. If we do that, we will stay the largest market for many years and thus offer companies an intrinsic advantage to manufacture here.

Our trade deficit in goods equals about 40% of our manufacturing output – so if we balance the trade deficit by substituting domestic production for imports, we will increase manufacturing employment by 4 million jobs and overall employment by 8 million jobs due to the manufacturing multiplier effect.

In order to help companies decide objectively to reshore manufacturing back to North America or offshore, the not-for-profit Reshoring Initiative’s freeTotal Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

In today’s dynamic manufacturing environment, companies have several attractive options to consider when expanding, relocating or simply starting a new manufacturing facility. The global economy is still healing from the economic downturn of the past years, but there is a light at the end of the tunnel. Mexico is poised, standing ready, willing and able to attract world class manufacturing to their shores.